US institutional plans report positive but slow progress for first half

The median US corporate, public, and foundation/endowment plan experienced positive results for the second quarter of 2005, according to a Mercer survey.

According to Mercer Investment Consulting's (Mercer IC's) Summary Performance of US Institutional Portfolios survey, the median corporate pension plan had a second-quarter gain of 2.2%. Public-sector pension plans gained 2.4% while foundation/endowment funds had a gain of 2.2%.

On a year-to-date basis, corporate plans had average gains of 1.3%, while public plans and foundation/endowment plans earned 1.5% and 1.1%, respectively. Over a 10-year timeframe, all three plan types have averaged between 9.1% and 10.1% on an annualized basis.

EQUITY PERFORMANCEAccording to Mercer IC‚s analysis, both value and growth managers produced positive second-quarter results, with the median growth manager outperforming their value-oriented counterparts by 80 basis points. Based on Mercer IC‚s 2005 Fearless Forecast, an annual survey of investment managers‚ capital market expectations, large-cap equities are forecast to return 7.3% during 2005, yet the asset class is off to a very slow start with a negative return of 0.8% on a year-to-date basis. The small-cap asset class, as represented by the Russell 2000 Index, posted a loss of 1.3% for the first half of the year, versus a forecast of 7.4%.

The median large-cap manager outperformed the S&P 500 Index for the second quarter by 30 basis points, and outperformed the index by 140 basis points on an annualized basis over the last 10 years. Small-cap managers underperformed their large-cap counterparts by 240 basis points over the current quarter. The median small-cap manager gained 4.1% while the median large-cap manager gained 1.7%.

The international equity asset class, as represented by the MSCI EAFE Index, lost 0.8%, underperforming its US large-cap counterpart for the quarter by a margin of 220 basis points, but equaled the performance of US large-cap equities over the first half of the year. Currency gains detracted from non-US securities during the second quarter of 2005 as the dollar strengthened against most foreign currencies.

Within the international asset class, the growth style outperformed value equities by 90 basis points both for the quarter and the year to date. According to Mercer IC‚s Fearless Forecast, international equities were expected to earn 7.8% for 2005, yet the asset class posted a first-half loss of 0.8%.

FIXED INCOME PERFORMANCEWithin the fixed income asset class, the median core fixed income manager equaled the performance of the Lehman Brothers Aggregate Index in the second quarter but slightly exceeded the index on a year-to-date basis by 10 basis points. Over a 10-year period, the median manager has outperformed the index by 30 basis points.

Mercer‚s 2005 Fearless Forecast predicted an annual return of only 2.7% for the core fixed income asset class. However, the asset class has already returned 2.5% during the first half of the year.

Core opportunistic managers underperformed the Lehman Brothers Index by 10 basis points during the quarter but slightly outperformed the index by 10 basis points on a year-to-date basis. The median high-yield manager posted a gain of 2.3% for the quarter.

In assessing international fixed income performance, the median manager had quarterly losses of 2.6% and 1.1% for non-US and global mandates, respectively. Over a 10-year period, the median manager in both universes outperformed their respective benchmarks.

ABOUT THE SURVEYSummary Performance of US Institutional Portfolios is published quarterly by Mercer Investment Consulting, Inc. Mercer IC uses the survey to provide marketplace participants with summarized performance data for the most recent quarter and historical periods. Summarized information is shown for plan sponsors at the total plan level, while manager performance data are provided at the asset class and sub-asset class levels.

Summary Performance of US Institutional Portfolios may be downloaded free of charge from www.mercerIC.us. Please note: All performance is measured in US dollars, before investment management fees are deducted. Mercer IC's 2005 Fearless Forecast also may be downloaded from the site at no charge.